The Webjet Limited (ASX: WEB) share price was on fire on Tuesday and rocketed materially higher.
The online travel agent’s shares jumped over 11% to finish the day at $4.10.
Despite this strong gain, the Webjet share price is still down over 57% since the start of the year.
Does this make Webjet shares a bargain buy?
Unfortunately, at the current level I think Webjet is far from a bargain buy. In fact, I believe it shares are very expensive despite their significant decline.
As I mentioned here previously, at the start of the year when nobody had heard of COVID-19, Webjet’s market capitalisation stood at just under $1.3 billion.
A market capitalisation is essentially the value of the company. It represents the total number of shares on issue multiplied by the share price of the time. At that point Webjet had a total of ~135.6 million shares outstanding and a share price of $9.49.
How much do you think Webjet’s market capitalisation is today?
Given that its shares price is down 57% since the start of the year, you might expect that its market capitalisation would be down by the same amount to $559 million. But it isn’t.
Webjet actually has a market capitalisation of approximately $1.4 billion.
Yes, you read that correctly. Despite the tourism industry grinding to a halt during the pandemic and the next year or two looking incredibly uncertain, investors are giving Webjet a higher valuation.
How is this possible? This appears to have been caused by investors not taking into account Webjet’s highly dilutive capital raising.
This capital raising means there are now a total of ~339 million shares outstanding. Which, when multiplied by the current share price, equates to a market capitalisation ~$100 million higher than its pre-pandemic valuation.
Short interest building.
In light of this, I can’t say I’m surprised that short sellers have begun to target Webjet. Short sellers are investors that profit when a share price declines.
On Monday, Webjet had 9.2% of its shares held short, making it one of the 10 most shorted shares on the ASX.
In light of the above, although I am a big fan of Webjet and its brands, I think it is a very risky share to own at the current level.
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More reading
- ASX 200 jumps almost 4%, Webjet share price soars
- ASX 200 falls 2%, ASX travel shares drop heavily
- These 5 ASX shares were last week’s best performers
- Is the Webjet share price ridiculously cheap?
- ASX winners and losers from last week
Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Webjet Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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